In re Supreme Industries, Inc. Securities Litigation

United States District Court, N.D. Indiana, South Bend Division

May 25, 2018

In re SUPREME INDUSTRIES, INC. SECURITIES LITIGATION

OPINION AND ORDER

PHILIP
P. SIMON, JUDGE

This is
a class action against Supreme Industries Inc. and two of its
officers for alleged violations of federal securities laws.
The lead Plaintiff, Kenneth Fishman, purchased shares of
Supreme during the relevant time frame. Fishman alleges that
the Defendants engaged in a fraudulent scheme to artificially
inflate Supreme's stock price by misrepresenting the true
nature of the company's order backlog, which he claims is
the company's surest indicator of future financial
success. Fishman also claims that the Defendants provided a
prediction of the company's future backlog even though
they knew adverse facts that undermined the prediction. The
Defendants seek dismissal of the complaint.

Background

Here
are the facts as told to me by Fishman in his amended
complaint (as well as documents incorporated into it and
public records), which I accept as true for present purposes.
Supreme is a publicly traded company headquartered in Goshen,
Indiana. [DE 53 at 10, ¶17.] It manufactures truck body
parts for commercial and other speciality vehicles.
[Id. at 5, ¶2.] The company is managed by a
small cadre of key executives, which includes the individual
Defendants in this case - Mark Weber, the Chief Executive
Officer, and Matthew Long, the Chief Financial Officer.
[Id. at 5, ¶3.]

Kenneth
Fishman alleges that he purchased 3, 000 shares of Supreme
common stock in September 2016 at prices of $18.26 and
$17.69. [Id. at 9, ¶16; DE 19-2 at 3.] He sold
all of his shares on November 9, 2016 at $12.08 and $12.03
per share, for a total loss of $12, 570. [DE 19-3 at 2.] He
brings this action on behalf of himself and all similarly
situated purchasers of Supreme securities between October 22,
2015 and October 21, 2016 (the “Class Period”).
[DE 53 at 4, ¶1.]

Supreme
specializes in building truck bodies “to order, ”
completing most of the production after a customer places an
order. [Id. at 6, ¶5]. When an order is placed,
it enters Supreme's “backlog, ” which is its
unfinished work or customer orders that have been received
but not yet completed. [Id. at 6, 18, ¶¶5,
42.] When work is completed and shipped, Supreme records it
as revenue and reports it as part of its net sales.
[Id.] Supreme repeatedly stated that its backlog was
a critical indicator of the company's current performance
and the surest indicator of future revenue, and it disclosed
its backlog figures to investors on a quarterly basis.
[Id. at 6, 18, ¶¶5, 42, 44-45.]

Supreme
serves a variety of customers, including national rental
fleets, national and regional leasing companies, truck
chassis dealers, and fleet operators. [Id. at 15-16,
¶35.] The company divides its customers into three
categories: retail, fleet, and other. [Id.] Retail
clients account for the most significant percentage of
Supreme's annual sales, but these sales are spread across
hundreds of accounts that may or may not purchase from
Supreme again. [Id.] Fleet customers, on the other
hand, which include national truck rental companies such as
Budget and Penske, are fewer in number but spend more and
typically place orders at regular intervals. [Id.]
According to the Defendants, fleet customers include both
rental fleet and other fleet operators. [DE 62 at 22 n.5.]
Fleet orders are typically reflected in the first half of
each year. [DE 53 at 17, ¶39.] Supreme repeatedly
conveyed these trends to investors. [Id. at 21-22,
24-26, ¶¶55, 63, 67-69.] Supreme further disclosed
this trend in its 2015 Form 10-K, stating that
“Seasonality arises due to the Company typically
participating in bids for large fleet contracts. If
successful, the fleet orders generally require shipment of
the truck bodies in the first and second quarters.”
[Id. at 17, ¶39.]

Supreme
reports its financial results on a quarterly basis in a press
release and SEC filing. These reports include Supreme's
backlog at the end of each quarter. [Id. at 18,
¶44.] Supreme does not disclose any granular-level
detail about the backlog, including the identity of its
customers or the exact composition of the backlog.
[Id. at 19, ¶47.] Supreme also holds a
quarterly conference call with investors to discuss its
results. [Id. at 13-14, ¶¶30-31.] These
calls, which include both Weber and Long, begin with prepared
remarks, but investors are also given the chance to ask
questions during an unscripted question and answer portion.
[Id. at 19, ¶48.]

On
October 22, 2015, Supreme issued a press release announcing
its results for the third quarter of 2015. [Id. at
24-25, ¶65.] This disclosure included Supreme's
backlog, which was $74.4 million. [Id.] In its Form
10-Q filed with the SEC, Supreme provided additional
information regarding the backlog, including that
“[c]ompared with last year, new order intake was
stronger in the third quarter of 2015 across both retail and
fleet work truck product lines.” [DE 63 at 67.]

Supreme
also held its quarterly earnings call. On the call, in his
prepared remarks, Weber announced that its 2015 third quarter
backlog was 46.7% higher than the 2014 third quarter. [DE 53
at 24-25, ¶¶65, 67.] Weber stated, “The
combined performance of our sales and operations teams
resulted in strong third quarter orders for trucks and
specialty vehicles.” Weber added that this
“notable year-over-year growth” was
“encouraging.” [Id. at 24-25, ¶65.]
Weber noted that they were “picking up some additional
demand on the leasing side” from national rental
companies including Penske, Ryder, and Budget. [DE 63 at 53.]

Participants
on the call asked questions about the backlog. When asked for
“a little color in terms of when your backlog is
typically realized, ” Weber explained that lead times
are generally longer for rental fleet orders than for retail
and normal leasing business. [DE 53 at 25, ¶68; DE 63 at
52.] Weber added “[s]et aside the rental fleet
business, because as you know, we typically are quoting that
and securing those orders in the fourth quarter and they
don't flow through typically until the second quarter ...
none of that is really in our backlog right now.” [DE
53 at 25, ¶68; DE 63 at 52.] Another analyst asked for
the source of the increased backlog and whether it was
attributable to extended lead times on medium-duty chassis
availability. Weber responded that it was “a little
bit” of the reason, but that “a lot of our growth
this year has been in the medium duty side. I would say that
our backlog is a little more titled towards medium-duty than
light-duty.” [DE 53 at 25-26, ¶69.]

On
February 18, 2016, Supreme announced its results for the
fourth quarter of 2015. Supreme reported “significantly
improved financial results” for both the fourth quarter
and 2015 as a whole. [Id. at 26, ¶71.] In
addition, Supreme announced that its backlog as of the end of
2015 was $98.1 million, representing a more than 31% increase
from the prior quarter. [DE 63 at 83.] This increase, Supreme
said, was because of new order rates for trucks across both
retail and national accounts, as Supreme secured new
customers and add-on business from national accounts.
[Id. at 112.]

During
the fourth quarter earnings call, Supreme noted that the
backlog included fleet orders, which were “pretty much
flat, ” and it cautioned that “[r]ental fleet
demand is expected to moderate somewhat for 2016.” It
also said that “rental demand also tends to be more
sensitive to near term economic conditions.” [DE 63 at
90.] Moreover, it indicated that because of the “choppy
outlook of some economic indicators, we are keeping a
vigilant watch on leading indicators and market
conditions.” [Id. at 89.]

Supreme
next disclosed, on April 21, 2016, that its first quarter of
2016 results concerning its net sales, income, and gross
margin had again improved. It also announced that its backlog
had increased to $102 million. [DE 63 at 214.] Weber stated
that the backlog provided “additional confidence that
our regional sales teams are gaining traction with a broad
range of retail end users and leasing channel partners,
” but he noted that “rental fleet orders were
mixed, as some accounts are trimming expenditures.”
[Id. at 219.]

On July
21, 2016, Supreme announced its 2016 second quarter results.
It reported improved second quarter and first-half results,
including improvements in its net sales, net income, and
margins. [DE 53 at 26, ¶71; DE 63 at 274, 303.]
Supreme's backlog was $75.5 million, which was an
increase year-over-year. [DE 63 at 274.]

During
the earnings call the next day, July 22, 2016, the Defendants
articulated a somewhat pessimistic outlook for Supreme. They
told analysts that Supreme had seen “some indications
of demand moderation late in the quarter, ” it
“had lower year-over-year fleet business, ” and
it had “lost some business on the fleet side.”
[DE 53 at 28, ¶77; DE 63 at 280, 296.] The Defendants
further disclosed that “ACT data reported that June
medium-duty truck orders were down 10% sequentially from May
and 1% below June 2015.” [DE 63 at 280.] The Defendants
also predicted “some softness in the NTEA numbers in
May and June, ” saying that they were going to be
“a little weaker.” [Id. at 293.]

One
analyst on the call noted the “slowing industry,
” and he asked for “a little kind of color in the
best way for us with gross margin in the back half of the
year” and 2017. [DE 53 at 27, ¶73; DE 63 at 284]
Long's response to that question forms much of the sum
and substance of this case. Long told the analyst that
“without giving guidance ... we had some serious
leverage on our fixed cost with the increased volume as you
look at the backlog, the backlog is going to settle more
towards the way it looked Q3 last year. So I
wouldn't expect the same level of leverage on fixed
cost.” [DE 53 at 27, ¶73.] Long went on to say
that this “depends on how the volume comes out in the
current quarter.” [DE 63 at 284.] It is the italicized
portion of this quote that is claimed to be actionable.

On
October 20, 2016, Supreme reported its third quarter 2016
results. Although higher net income and sales were reported,
Supreme also disclosed that the backlog was $58.1 million,
which was down from $74.4 million the previous quarter. [DE
53 at 28-29, ¶78.] Comparing third quarter 2016 backlog
to the previous year (third quarter 2015), it had decreased
22%. [Id. at 8, 22, 28-29, 40, ¶9, 56, 78,
115.] In explaining the reason for the year-over-year decline
in the backlog, Weber provided two reasons: first, although
backlog at the start of the third quarter of 2016 was
actually higher than at the same point the previous year, net
sales were about $10 million higher this year versus last;
second, the higher backlog from last year was due to
“two large fleet replacement orders and the timing of
an annual fleet account order.” [Id. at 8, 26,
29, ¶9, 70, 81.] The Defendants acknowledged that the
lack of orders from fleet customers weighed heavily on
backlog. [Id. at 30, ¶84.] A corresponding
press release stated that, “The timing of several large
orders increased backlog at the end of the third quarter
2015.” [Id. at 28-29, ¶78.] In the press
release, Weber also acknowledged that “industry-wide
growth in commercial truck sales decelerated during the
summer months.” [Id. at 29, ¶79.]

On the
earnings call, Weber also explained that the “economy
remains choppy, ” and that “[e]conomic indicators
had turned more bearish during the summer months with several
cross-currents resulting in delayed purchase decisions”
by customers. [DE 63 at 353, 361.] Weber provided some
reasons that optimism had been dampened, including “the
lack of small business confidence, several weak manufacturing
sectors, limited export support, and the uncertainty of the
November elections.” [Id. at 363.] He further
explained that the trucking industry was slowing and there
was research suggesting that sales in 2016 would drop and
projected growth for 2017 had been lowered from predictions
of 1.8% to only 0.6%. [Id. at 354.] Weber also
disclosed that Supreme had seen “some of the rental
accounts pull back pretty hard, ” and he noted that his
own discussions with multiple leasing companies and end users
confirmed the caution created by the economic cross-currents.
[Id. at 357-58.]

The day
after the earnings were reported (October 21, 2016), a short
seller named Cliffside Research issued a “Flash Alert,
” rating Supreme's stock as a “Strong
Sell.” [DE 53 at 21, 33-34, ¶¶52, 90-93.] The
report noted the cyclical nature of the trucking industry and
Supreme's valuation after experiencing “explosive
earnings growth over the past year.” [DE 63 at 469-88.]
Supreme's stock price fell by $4.28 per share that day,
or nearly 24%, from $17.96 to $13.98. [DE 53 at 32,
¶88.] The next trading day, the stock fell again in
price by another $2.38, to $11.30 per share. [Id. at
32, ¶89.] But the stock rebounded rather quickly; by
January 23, 2017, the stock was selling at the pre-decline
price. [DE 63 at 498.]

Analysis

The
defendants have moved to dismiss the first amended complaint
under Federal Rule of Civil Procedure 12(b)(6). The standard
for deciding this motion is not the typical standard that
applies in ordinary motions to dismiss. Rather, the Private
Securities Litigation Reform Act (“PSLRA”)
provides that the complaint in a securities fraud action must
do two things: first, the complaint must “specify each
statement alleged to have been misleading [and] the reason or
reasons why the statement is misleading.” 15 U.S.C.
§ 78u-4(b)(1). Second, it must, “with respect to
each act or omission, ... state with particularity facts
giving rise to a strong inference that the defendant acted
with the required state of mind.” Id. §
78u-4(b)(2). Here, the required state of mind is scienter,
meaning a mental state that involves an intent to deceive or
defraud. Tellabs, Inc. v. Makor Issues and Rights,
Ltd., (Tellabs II), 551 U.S. 308, 319 (2007).

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